Moneyball without the ball

Vanadium battery demand and ways to invest in its potential

In past portfolio updates I briefly mentioned my position in Largo Resources and how I have a positive outlook on the vanadium market. I wanted to expand on those thoughts in this post.

Vanadium Supply and Demand

The Vanadium market has been in deficit for over five years. I don’t think that is going to change this year and in fact there are factors that could exacerbate the deficit in 2018.

Vanadium deficits have been precipitated by low prices which have led to mine closures and a lack of new mine development. The low prices were a consequence of cheaper “slag” production in China. A significant portion of vanadium supply comes via a by-product of producing steel (called slag) from some types of iron ore.

As China steel production has boomed, slag production has increased. This resulting supply has pushed expensive mine supply out of the market. As well integrated steel production operations outside of China, which also produce vanadium, have shutdown, like Evraz Highveld in South Africa, which closed in 2015:

The consequence is that inventories have been falling for some time. Recently, this has been exacerbated as long-time stagnant vanadium demand has started to increase.

The traditional usage of vanadium is as an additive to steel that improves its strength. Demand as a steel strengthener has remained fairly flat (though that may change this year as I will discuss). But a new source of demand has emerged – vanadium redox flow batteries.

Vanadium redox flow batteries

I started looking at vanadium back in September when I began looking into ways of playing the electric vehicle (EV) revolution. Vanadium is not directly related to EVs. Vanadium redox flow batteries are not a realistic alternative for vehicles. They are, however, an excellent way to store electrical energy at a large scale. So they are complimentary to the story.

A few months ago I read an excellent book called The Grid. One of its main points is that our grid is about to undergo a massive shift due to renewable generation. But there is a major problem with renewable generation: it is not aligned with consumption patterns. An energy storage solution is necessary.

Because vanadium redox batteries are well-suited for large energy storage applications, they are well suited to helping solve the storage problem.

But vanadium redox flow batteries do use a lot of vanadium. A few numbers will go a long way to illustrating the opportunity:

First consider that the vanadium market is small; its only about 80,000tpy.

From this article, it takes 15 tonnes of vanadium to build 1.6MWh of vanadium redox flow battery capacity. What this is saying is that if these batteries are implemented at scale, they are going to require A LOT of vanadium.

If Vanadium redox flow batteries catch on in scale, demand for vanadium is going to increase substantially.

Other factors weighing on supply and demand

In addition to battery demand, other positive developments are occurring. China is curbing the import of many of the sources of iron ore that produce vanadium as a by-product as part of their efforts to lower pollution. Producing vanadium from slag is dirty, particularly when its from low quality slag. So China is banning the import of such material.

I talked about China’s anti-pollution initiatives in my post about rare earth elements. Much of the same dynamic that I described for neodymium applies to Vanadium. There has been specific actions in the vanadium market that will squeeze supply further, as the Metal Bulletin reported:

a scrap import ban by Chinese authorities at the end of the year will cut approximately 4,500-5,500 tonnes

At the same time, a second move by China will increase demand. As another Metals Bulletin article describes, changes to China’s rebar standards could cause “vanadium consumption to surge 30%”.

My preferred way of playing vanadium is Largo Resources. I also have a smaller position in Prophecy Development Corp. I prefer Largo because they are more liquid and they are currently producing. In fact I believe that Largo is the only public producing vanadium company on the market. They own one of the few primary vanadium mines still producing after the Chinese slag onslaught.

Largo isn’t perfect. They have a habit of issuing shares at a cheap price (like this recent 80c placement back in November). There has been insider selling. They are a single mine operator, so they have the risk of a bad quarter if the mine has a hiccup. And they aren’t particularly cheap based on historic vanadium prices.

Of course the bet here is that history is not a good guide for the future.

I estimate that at current levels Largo is trading at about 7x EBITDA based on the third quarter realized vanadium price of $8.75/lb. As slide 6 of the Prophecy Development Corp presentation I linked to above references, current vanadium prices are $12.80/lb. As is the nature of mining operations, apart from taxes, all price increases in the commodity fall directly to the bottom line. I estimate that Largo trades at a little less than 4x EBITDA at current vanadium prices.

Of course, at some point price increases destroy demand. If this was purely a steel story, like previous prices spikes have been, I would be cautious. But given the emergence of vanadium redox flow batteries and the significant demand they could represent if adopted at even a modest scale, I remain optimistic that prices can hold these levels and maybe even go higher. I don’t think that Largo (and Prophecy) are reflecting this yet.

One wild card is the flow battery. Most people rightly see these as very large units suitable for grid applications such as peak shaving but one or two organisations are thinking the unthinkable about putting them in cars because they are headed for $100 per kWh and size and weight might just fit the bill in due course. Toyota’s advanced research people told us recently that they would not dismiss the possibility.

Clearly there is research going on and so I wouldn’t dismiss it so quickly. The flow batteries charge faster, they have longer lives, so there are reasons that investigations into the limitations will continue. The question was whether the V battery could be used in EVs and I think based on what I have read, at some point that seems possible. I’d like to see a definitive piece on why the flow batteries cannot be advanced to compete with Li-ion at some point? I havent come across that yet.

Fair points and I can’t make a strict case against it.
But I cannot see (also from these articles) how it could possibly work.
I have a physics background and from my understanding, it is difficult to increase the energy density of the system. Because then you get quickly into aggressive materials. Also, if you could increase the energy density of the electrolyte you need to adjust your electrodes. The chemical reaction is basically dependent on the contact surface between electrodes (especially the cathode is limiting) and electrolyte. You can’t just make it faster, as the process is exotherm. You can make it bigger of course, but in contrast to stationary application, in a car you are limited.
And simply “refueling” the electrolyte sounds easier than it is.

Again I would not rule it out, but clearly there is nothing really to suggest why it would be the best solution in cars.
Anyway the case for Vanadium stays, with or without cars.

You are totally right and innovation will continue. I personally love to see such developments.
But how much have they improved the energy density? I didn’t see a concrete number, maybe I missed it.
In this example it comes down to solving more Vanadium. There is a physical limit to that, especially at ambient temperature. Progress, yes. Double and tripple, not so sure.

Interesting comments – I too have a background in Physics and agree with the German reader on pretty much all points.

Whilst Lithium-ion has had many thousands of people working on trying out new mixtures, processes and mesoscopic shapes of electrode structures Vanadium Flow batteries have only had tens to hundreds of people working in the field – so in some ways you might think that there is more chance of a step change improvement (as the UET guys did when working at PNNL when they developed the mixed acids electrolyte.)

This development of course came about only after the UNSW patents on the classic Vanadium electrolyte expired after their first 20 years – only then did many people reenter the research sector/commercial market, after having left UNSW to work through a number of partners who could not gain commercial traction as they were perhaps too far ahead of their time. Back in 2000 large scale energy storage was not the thing that it is today.

Ultimately though the VRFB machine is a very much simpler device – it may not look it with lots of pipes and plumbing and wires, when compared with a black plastic block of a lithium-ion battery, but we understand the processes in a VRFB very much better than we understand, or will perhaps ever understand the internal processes that determine how a solid state battery destroys itself after 1000 cycles or after discharging below 20% State of Charge. That is why I like the VRFB so much – anyone can build one.

As an example of this I like to cite the the Fraunhofer ICT research group in Karlsruhe – with a relatively small research team of something like 10-15 people in a few years and in a single step they have gone from building VRFBs storing 10’s of KWh to one that can store 20 MWh. That is a factor of 1000 in just a single jump. Of course these people are very smart guys, but they do not have the resources of a giant industrial chemical company like BASF or ICI behind them, they are just a smallish research group.

The issue now and always for Vanadium Flow batteries is the question of the cost of Vanadium, which has been historically volatile and highly dependent on the V-supply coming as a by-product of steel production form ores high in Vanadium (and usually also Titanium – so called TiVan ores). Given that over 90% of Vanadium production has been used to put the Vanadium back (in a more controlled fashion) into the steel this relationship had a delicate balance which usually worked but could be tipped out of balance quite easily by sudden demand for extra Vanadium use, eg when China improved their rebar standards back in 2004.

However the post 2014 reduction in steel prices, plus improved environmental emissions targets in China has led to a significant reduction of Vanadium coming via the so-called Vanadium Slag route and this has led ultimately to the running down of stockpiles and since mid 2017 the significant increases of Vanadium price that we have seen (eg https://www.thebushveldperspective.com/vanadium-prices ).

The question for VRFBs is whether the cost of the Vanadium in the electrolyte can somehow be taken out of the equation by allowing the user to never actually have to own the electrolyte, but simply to lease it. This sounds like getting something for nothing, but actually it is very similar to the model that is used for platinum catalysts in industrial chemicals processing – the user never actually owns the platinum they just pay a charge to use the catalyst, then return they highly valuable material back to the supplier when the catalyst has lost its effectiveness. VRFB electrolyte should run for 10s of years without changing significantly so is one step easier to deal with than platinum. This idea is discussed in my article here:- https://www.thebushveldperspective.com/blog/public-blog-1/post/vanitec-2nd-energy-storage-meeting-part-1-206

Thank you very much for the insights! Since you seem very knowledgeable on VRFBs I was wondering if you have heard of a company called Gildemeister and the company that took them over, CellCube (formerly Stina Resources). I’ve been digging into them as the stock has plummeted and am curious if their CellCube technology is legitimate and has the potential to take some share in the growing VRFB market?

A second question – are you familiar with the NX Flow VRFB from NEXTracker and if so have any comments on that?

Gildemeister was the Austrian originator of the Cell cube VRFB battery, last year a number of the key staff from there did not attend the International Flow Battery Forum so it was felt that there was something wrong with the company – about 3 months later the plug was pulled on them by their german owners. A number of staff went to join RedT Energy, who I believe also picked up a number of the ex-Gildemeister orders whilst it seems that the formal IP and equipment may have been primarily bought up by Stina resources who have been doing an energetic job in trying to acquire the elements of an integrated Vanadium/VRFB platform.

This concept of such an integrated V/VRFB platform was of course first introduced by Bushveld MInerals following their partnering with UniEnergy Technologies around 2016 – these were the first people who actually made a clear coupling between V mining and VRFB production.

I do not know why the Stina/Cellcube SP has dropped as they are only quite new to a listed market are they not – in fact I was unaware that they had been listed.

There are of course quite a few pure Vanadium explorer companies who have done their level best to try and jump onto the increasing Vanadium price bandwagon. However most if not all of these are at least 3 years away from producing any Vanadium so why they should be given a fair valuation based upon what they have in the ground, when existing producers such as Largo and Bushveld Minerals are not yet being afforded fair valuation on the actual amounts of end product that they produce (with zero for what they havein the ground as I can see) defeats me.

This is just one of the ways in which the markets appear to behave irrationally. However when you appreciate that what we see as the market behaviour is nothing more that the end result of many agent’s independent actions you can start to understand that there is no reason why market behaviour should be logically comprehensible like we think human behaviour is.